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PROJECT TOPIC- EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

PROJECT TOPIC- EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

 

ABSTRACT

This study investigated the causal relationship between foreign investment inflows disaggregated into foreign direct investment and foreign portfolio investment inflows and macroeconomic performance in Nigeria. Most emerging economies around the world strive to attract foreign investment inflows because of the gap between the domestic savings and investment especially into the real sectors of theireconomies.
This ismost probably because, foreign investment inflows are seen as an amalgamation of capital, technology, marketing and management of resources which are useful in harnessing host country resources. Since globalization, the flow of foreign investments into emerging economies has increased and the debate on the effect of these foreign investment inflows on macro economic performance has also intensified. Nigeria is one of the largest beneficiaries of foreign direct investment (FDI) and foreign portfolio investment (FPI) in sub-Saharan Africa. Yet their impact on macroeconomic performance has not been fully ascertained. It is, therefore, against the foregoing that this study sought to examine the effect of total foreign investment inflows on gross domestic product, exchange rate, inflation rate and interest rate in Nigeria. The study adopted the ex-post facto research design. Annual
time series data for 26 years for the period, 1987 – 2012 were sourced from the Central Bank of Nigeria (CBN) statistical bulletin. Four hypotheses were formulated and tested using the ordinary least square (OLS) regression method. The results revealed that total foreign investment inflows had positive and significant effect on gross domestic product in Nigeria;foreign direct investment had negative impact on exchange rate while foreign portfolio investment had positive impact on exchange rate. Again, total foreign investment inflows have positive and insignificant impact on inflation whereas foreign direct investment had positive impact on interest rate and foreign portfolio investment had a negative impact on interest rate. The study recommends, among others, that incentives such as tax holidays should be used to direct foreign investment inflows towards non-oil real sectors of the economy in order to boost export. This will obviously lead to strongerexchange rate, lower inflation, and encourage competitive interest rate which will encourage savings and sustainable economic growth.

CHAPTER ONE
INTRODUCTION

1.2 BACKGROUND TO THE STUDY

Globalization is the process through which economies, societies and cultures relate through trade, transportation and communication. Economic theory clearly points to the tremendous potential advantages of cross-border capital flows.Neoclassical economists support the view that capital flow is beneficial because they create new resources for capital accumulation and stimulate growth in developing economies with capital shortages. Various types of these flows are welcomed to bridge the gap between domestic saving and investment that accelerate growth. Capital flow play significant role in economics. Finance is the life blood of any enterprise. With sufficient finance, an entrepreneur can get other factors of production such as labor, machinery/technology, management as well as raw materials and be involved in any other business activity (Okafor and Arowshegbe, 2011). According to Fuch- Schtindekn and Herbert (2001), foreign investments usually have absolute impact on domestic investment, and the productivity of investment, technology overflow, and household financial development. Fitzgerald (1998) theoretically argues that higher capital inflows lower interest rates, which help increase investment and economic growth. On the empirical side, using data from seventeen emerging economics, Bekaert and Harvey (1998) find a positive relationship between equity capital flows and key macroeconomic indicators, including growth and inflation. Evidence from Latin America and far Eastern economies shows that capital inflows tend to appreciate real exchange rates, lower interest rates, and increase consumption,
investment and economic growth (Antzolatus 1996; Calvo 1994; Carbo and Hernandez 1994; Fernandez-Arias and Montiel 1995, Khan and Reinhart 1995).
In contrast, the financial crisis that came up in Asia, Russia and Latin America have created doubts about the benefits of capital inflows and emphasized the necessity of capital controls. Agosin (1994) argues that capital inflows are used to finance imports and domestic consumption. Rodrik (1998) contends that capital flows have no significant impact on economic performance once the impact of other variable, such as education level, the initial level of income, the quality of government institutions, and regional dummies, are controlled for.
Foreign investment comes in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The former entails a controlling authority over the concerned enterprise; at times it means setting up of new projects. Portfolio investment by contrast is essentially a financial transaction – purchase of stocks, bonds and currencies as assets. Many developing economies have over the years depended heavily on the attraction of financial resources from outside in different ways. Official and private capital flows including FDI and FPI as a way of accelerating their economic growth (Odozi, 1988; Ekpo, 1997; Uremadu, 2008). Some nations exhibited a choice for FDI since they regard it as an avenue for overcoming the slow trend in official and private portfolio capital flow (Uremadu, 2008).

The need to draw foreign capital in non-debt constituting way is one of the reasons, why emerging economies wish to encourage private capital flows. Thus, there has been a dramatic increase in the magnitude of capital flows from countries in the North to emerging economies across the South where the need is high. According to Siamwalla (1999) the relative low yields in industrial countries together with impressive economic growth and attractive returns in developing, countries motivated investors to relocate their funds to direct investments. He assumes that the growth in international foreign investment inflow is an aftermath of good mixture of macroeconomic variables as well as the drift towards trade globalization, international financial linkages and expansion of production bases overseas. He further states that macroeconomic variables are indicators or main signposts indicating the current trends in the economy. Some main macroeconomic variables identified by Keynes (1930), that study foreign inflows into an economy are gross domestic product (GDP), exchange rate, interest rate, inflation rate and money supply.
Nigeria as an import dependent economy needs foreign investment to enhance her investment needs. That is why since the emergence of democratic governance in May 1999, she has embarked on some concrete means to encourage cross-border investors into her domestic economy. Some of these means are: the repeal of laws that are adverse to foreign investment increase, promulgation of investment laws, introduction of policies with favorable atmosphere like ease of businesses, fast export and import processing methods, fight against advanced fee frauds, instituting economic and financial crimes commission.

These definite measures seem to have been making positive impact on Nigeria’s foreign capital inflows (Uremadu, 2011). Nigeria has also been a mono-cultural economy and relies heavily on crude oil as the major means of foreign exchange. Oil is vulnerable to the inconsistencies of production and prices at the international market. So returns from it may be subject to serious inconsistencies. This usually results in mono-cultural economies being deficient in investment capital.Poor economic management is another feature in Nigeria economy and which often leads to trade imbalances, persistent fiscal deficit, insufficient domestic savings, low high inflationary pressure, poor infrastructural facilities, unemployment, low output and excess dependence on imports (Okafor, 2012).
A close survey of the Nigeria economy indicates that Nigeria has recorded trade imbalances in most fiscal years, indicating that total payments surpassed total receipts in relation to total imports and total exports (Amadi, 2002). Overall balance of payments became worse in 1999, 2002 and 2008 mostly because of increased outflow from capital accounts (CBN, 2009). Most of the capital outflow must be attributed to increased importation, declining exports mainly non-oil subsector and particularly due to external debt servicing required in meeting up with resource gaps. Essien and
Onvioduokit (1999) and Ariyo (1999) described debt servicing and reserve creation as fluctuating variables that create dependence on foreign capital in
Nigeria.Therefore, increase in foreign investment has stimulated debates about its influence on the macroeconomic performance of an emerging market like Nigeria.

PROJECT TOPIC- EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

 

1.2 STATEMENT OF THE PROBLEM

Nigeria is one of the largest beneficiaries of foreign direct investment (FDI) and foreign portfolio investment (FDI) in sub-Saharan Africa (Eboh,2013), but their impacts on macroeconomic performance have not been fully established. Nigeria’s macroeconomic performance in the two decades preceding reforms was generally negative (Ngozi and Philip, 2007). From 1992 to 2002, the annual GDP had an average of about 2.25 percent with a projected population growth of 2.80 per annum. This led to a reduction in per capita GDP over the years and which resulted in a decline of living standards of the citizenry.

However, in recent years the real GDP (at 1990 factor cost) is 7.0%, 8.0%, 7.4% and 6.3% in 2009, 2010, 2011 and 2012 respectively. The inflation level which is also an indicator of macroeconomic performance was averaging about 28.94 percent per annum over the same period, but has down gone to 10.8 percent in 2011 while slightly increasing to 12.2% in 2012. Capital inflows have been associated with a marked appreciation of the real exchange rate in most countries (Calvo, Ceiderman and Reinhart, 1993). In the case of United States net capital inflows have acted to reduce nominal interest rates (Willie, Belton and Cebula, 1995).

Again for Borio and Filardo (2006) and Ercakar (2001) strong inflow of capital into emerging markets could still be absorbed by the domestic economy without increasing inflation. Therefore, Fitz-Grald (1998) theoretically insists that higher capital inflows lower interest rates, which help increase investment and economic growth. Nigeria recorded over 20 percent of the total FDI to Africa and was rated first in 2011 with $8.92 billion as against $6.09 billion in 2010 according to World Investment Report (UNCTAD, 2012). Also, according to CBN (2009) FPI appears to have taken the centre stage and its share of private capital flows to Nigeria has been on a phenomenal increase that by 2007, FPI has surpassed every other type of capital inflows into Nigeria with official flows and bank loans declining in real terms. So, as consecutive governments make it their core objective to keep the economy open, capital inflows through investments soared.
However these increases in foreign investments have stimulated intense debates about their impact of an emerging economy like Nigeria. While some proponents stress its positive impacts on growth, critics express anxiety about its volatile nature whose flexibility could be unsustainable and adversely affect macroeconomic performance.
In Nigeria, however, the macroeconomic performance has generally been on the increase (Olutu and Kaine, 2011), foreign capital inflow, particularly in the area of foreign direct investment and foreign portfolio investment, seem to coincide with increased macroeconomic performance. Particularly, since 1986 total value of shares traded (TVT) and real Gross Domestic Product (GDP) have been on the increase respectively (CBN, 2010). Could foreign investment be said to have caused the increase in macroeconomic performance? This is the crux of the matter. This study departs basically from existing studies for Nigeria because previous studies like Olutu, et al (2011); Amadi (2002), Ayanwale (2007) examine either FDI or FPI and
one specific effect, where as this study is examining FDI, FPI and a set of macroeconomic variables (GDP, exchange rate, inflation rate and interest rate) to better assess the simultaneous effects of foreign investment inflows on macroeconomic performance in Nigeria.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the effect of total foreign investment inflows, disaggregated into foreign direct investment (FDI) and foreign portfolio investment (FPI) on macroeconomic performance of the Nigerian economy. The specific objectives to assess are –
1. The impact of foreign direct investment and foreign portfolio investment on economic growth.
2. The effect of foreign direct investment and foreign portfolio investment on exchange rate.
3. The impact of foreign direct investment and foreign portfolio investment on inflation rate.
4. The effect of foreign direct investment and foreign portfolio investment on interest rate.

PROJECT TOPIC- EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

 

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